MBS Day Ahead: Another Look at Inflation as The Enemy


Posted To: MBS Commentary

It's too easy and too common for experts and casual observers alike to discuss bond markets through the lens of inflation. It's easy and common because inflation is always a consideration for bonds. To understand exactly why this is, consider an example where you give me $100 today and I agree to pay you 11 payments of $10 dollars this year. That's a 10% return in dollars, but it's only a 10% return in value if there's no inflation. For instance, if the $110 you'll ultimately get back would buy a new pair of shoes today, if inflation rises, those same shoes might cost $140 next year. So you're $10 return would be more like a $30 loss if inflation were completely out of control. Those numbers aren't realistic when it comes to overall inflation metrics, but it…(read more)

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